Tuesday, 12 January 2010

Goodwill Hunting – attempting to split goodwill from an unregistered mark (the Incledon case)

A Western Cape High Court decision published in December flirts with the notion that a common law trade mark can be assigned without the goodwill of the business concerned. The case concludes that, on the facts, the particular unregistered trade mark was assigned with goodwill but the reasoning appears to endorse a view that an unregistered trade mark is capable of existing independently of goodwill albeit perhaps inextricably linked. Lawyers drafting business sale and purchase agreements should be cautious though to expressly state that an unregistered trade mark includes goodwill. The agreement in this case simply referred to "unregistered trade marks" which the respondent claimed did not include goodwill.

“The writers [Neethling & Van Heerden] express the view that the primary function of a distinctive [unregistered] mark is to distinguish an entrepreneur's own product from similar products, hence the mark has distinguishing value. The mark can exist independently of the undertaking and does not necessarily lose its value when such business ceases to exist. The mark can exist independently of the goodwill of the business, since it could continue to have value long after the business has closed down. It can therefore be assumed that when an entrepreneur assigns a distinctive mark to a third party, by implication he also transfers the goodwill or part of it which he has created. The distinctive mark or name individualizes the undertaking and contributes towards attracting custom and therefore the creation of goodwill. The distinctive mark can become an important, if not the most important component in the formation and development of goodwill.” Para 25 of the judgment.

The reasoning is difficult to follow. It seems to say that goodwill and a distinctive unregistered trade mark can exist independently of each other but that assigning them separately is not possible. Registered trade marks can of course be sold without goodwill.

If one purchases a right to an unregistered trade mark then the question one always asks is what are you purchasing, if you do not purchase the right to the goodwill symbolized by that trade mark? In this case, if one purchases a business as a going concern that trades using a distinctive trade mark then that unregistered trade mark is distinctive because of its inherent nature and/or because of the use made of it by the seller (the two methods of creating distinctiveness are recognised by the Trade Marks Act (see Section 9(2)). The use of the trade mark generates reputation which is a component of goodwill. Such goodwill would, in Afro Leo’s opinion, as a matter of logic therefore be included in such a sale.

Click here for Afro Leo's summary and other comments

Click here for information on how to split hairs
Click here for information about how to do the splits

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